Global headwinds facing interim budget

An interim budget will be presented when there are grave geopolitical tensions and lingering concerns over the slow pace of rural consumption.

External headwinds look set to be the biggest challenge for Finance Minister Nirmala Sitharaman while preparing the interim budget proposals for 2024-2025. Tensions are mounting in the Red Sea with the United States making reprisals against the depredations of the Yemen-based Houthi rebels on global shipping. Iran’s drone attacks on Pakistan, and the response has created more geopolitical fissures. These developments will have to be watched carefully for their potential impact on the Indian economy, currently the fastest growing in the world.

To clarify, the presentation of an interim budget implies that its formulations will be valid only till a new government takes over after general elections, expected in mid-2024. Yet the minister is bound to make more long-term projections in the expectation that the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) will return to power. The expectation is buttressed by surveys that indicate the ruling party will make a comeback, though there are few certainties in the political arena.

On the domestic front, the budget will be presented in the backdrop of data from the National Statistical Organisation (NSO) which shows GDP growth in the second quarter of the current fiscal (July-September) rose to 7.6 per cent, following 7.8 per cent in the first quarter. This is much higher than earlier projections, giving rise to assumptions that 2023-2024 will end with 7 per cent growth rather than 6.5 per cent as estimated.

The positive projections for the year have also raised hopes that the fiscal deficit target of 5.9 per cent will be met. These have been supported by buoyant revenue collections as the Goods and Service Tax (GST) inflows have consistently remained over Rs 1.6 lakh-crore for most of the year. December data shows GST collections have touched Rs 1.65 lakh-crore, still a healthy level though this is lower than the previous three months.

Similarly, corporate tax and income tax collections have been robust over the past year, growing at the rate of over 18 per cent for the former and even higher for the latter segment. Disinvestment receipts continue to disappoint with only one-fourth of the target having been met; but this is expected to be offset by robust tax revenue inflows.

While this is all to the good, expenditure needs will also be expanding in 2024-2025. The current financial year had seen a rise of 30 per cent in capex largely for infrastructure projects in the road and railways sectors. An increase in capex will have to be substantial yet again next year to push up demand and create more jobs. The latter has been an area of concern with the unemployment rate at 8.4 per cent in 2023, according to the Centre for Monitoring Indian Economy (CMIE).

Subsidies are another heavy burden, especially for foodgrains and fertilisers. The decision to provide free foodgrains to those at the bottom of the pyramid will make the subsidy bill much larger in the next fiscal. Fertiliser subsidy, on the other hand, may not rise much given that world prices have stabilised in recent months.

The one development that could upset the apple cart on the expenditure front is volatility in global oil markets. Prices of the Brent benchmark crude have risen to $80 per barrel after the latest attacks by Houthi rebels on merchant ships passing through the Red Sea. In case the conflict expands, bringing more countries into the fray, it could lead to a steep rise in oil prices. This, in turn, could raise the cost of oil imports and widen the current account deficit which is currently at a manageable level of 1 per cent of GDP.

Another worry is exports. These have slowed down by about 6 per cent in the first nine months of the current financial year. This is due to continuing recessionary conditions in key markets of the Eurozone and the US. Here, again, the strife in the Red Sea will have an impact as it has the potential to push up the costs of goods moving through this route. It could make exports more expensive and uncompetitive while adding to the landed cost of imported goods.

An interim budget is thus being presented at a time of grave geopolitical tensions even as there continue to be concerns over the slow pace of rural consumption. It may not submit proposals for a full year but will seek to set the tone for the coming fiscal in the hope of achieving higher growth. A level of 7 per cent is not enough to achieve the target of full development by 2047. The goal must be to push growth to 8-9 per cent annually. That is a difficult task to achieve in the budget even as the economy faces growing global headwinds.

(Sushma Ramachandran is a senior journalist.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.